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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices)
(zip code)
(650) 324-6868
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of February 1, 2000, 24,937,216 shares of the registrant's common stock, par
value $0.01 per share, which is the only class of common stock of the
registrant, were outstanding.
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<PAGE>
SOLA INTERNATIONAL INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended December 31, 1999
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements
Unaudited Consolidated Condensed Balance Sheet as of December
31, 1999 3
Consolidated Condensed Balance Sheet as of March 31, 1999
(derived from audited financial statements) 3
Unaudited Consolidated Condensed Statements of Income for the
three and nine month periods ended December 31, 1999 and
December 31, 1998 4
Unaudited Consolidated Condensed Statements of Cash Flows for
the nine month periods ended December 31, 1999 and December
31, 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands, except per share data)
<CAPTION>
December 31, March 31, 1999
1999 (derived from
(unaudited) audited financial
----------- statements)
-----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 24,377 $ 21,578
Trade accounts receivable, less allowance for doubtful
accounts of $7,559 and $7,003 at December 31, 1999 and
March 31, 1999, respectively.......................... 123,344 118,648
Inventories............................................. 195,791 168,755
Other current assets.................................... 22,876 20,486
-------- --------
Total current assets.................................. 366,388 329,467
Property, plant and equipment, at cost, less accumulated
depreciation and amortization......................... 152,902 153,000
Goodwill and other intangibles, net........................ 193,834 195,345
Other long-term assets..................................... 26,790 21,487
-------- --------
Total assets.......................................... $739,914 $699,299
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks.................................. $ 17,948 $ 17,490
Current portion of long-term debt....................... 3,412 4,510
Accounts payable........................................ 53,646 50,854
Accrued liabilities..................................... 37,782 31,313
Accrued payroll and related compensation................ 26,156 26,468
Other current liabilities............................... 3,993 2,709
-------- --------
Total current liabilities............................. 142,937 133,344
Long-term debt, less current portion....................... 4,483 5,782
Bank debt, less current portion............................ 117,500 103,000
Senior notes............................................... 99,662 99,632
Other long-term liabilities................................ 25,448 25,179
-------- --------
Total liabilities..................................... 390,030 366,937
-------- --------
Commitments and Contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000 shares authorized;
no shares issued..................................... -- --
Common stock, $0.01 par value; 50,000 shares authorized;
24,923 shares (24,867 shares as of March 31, 1999)
issued and outstanding................................ 249 249
Additional paid-in capital................................. 281,093 280,525
Equity participation loans................................. (10) (50)
Retained earnings.......................................... 86,412 70,578
Cumulative other comprehensive income (loss)............... (17,860) (18,940)
-------- --------
Total shareholders' equity............................ 349,884 332,362
-------- --------
Total liabilities and shareholders' equity............ $739,914 $699,299
======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ........................... $ 127,238 $ 126,345 $ 401,886 $ 388,539
Cost of sales ....................... 71,983 69,068 223,677 211,100
--------- --------- --------- ---------
Gross profit ..................... 55,255 57,277 178,209 177,439
--------- --------- --------- ---------
Research and development expenses ... 4,861 4,649 15,216 14,043
Selling and marketing expenses ...... 25,752 24,056 76,812 72,158
General and administrative expenses . 16,529 15,944 46,063 40,455
Special charges ..................... (657) 1,570 3,706 1,570
--------- --------- --------- ---------
Operating expenses ............... 46,485 46,219 141,797 128,226
--------- --------- --------- ---------
Operating income .............. 8,770 11,058 36,412 49,213
Interest expense, net ............... 4,963 4,543 13,912 12,881
--------- --------- --------- ---------
Income before provision for income
taxes and minority interest . 3,807 6,515 22,500 36,332
Provision for income taxes .......... (1,218) (1,491) (7,200) (11,626)
Minority interest ................... 86 152 534 570
--------- --------- --------- ---------
Net income ....................... $ 2,675 $ 5,176 $ 15,834 $ 25,276
========= ========= ========= =========
Earnings per share - basic .......... $ 0.11 $ 0.21 $ 0.64 $ 1.02
========= ========= ========= =========
Weighted average common shares
outstanding ...................... 24,875 24,792 24,871 24,770
========= ========= ========= =========
Earnings per share - diluted ........ $ 0.11 $ 0.21 $ 0.63 $ 0.99
========= ========= ========= =========
Weighted average common and dilutive
securities outstanding ........... 25,075 25,199 25,113 25,530
========= ========= ========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
<CAPTION>
Nine Months Ended Nine Months Ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Net cash provided by (used in) operating activities..... $ 9,793 $(11,009)
-------- ---------
Cash flows from investing activities:
Purchases of businesses.............................. (3,673) (8,601)
Investments in trade investments and joint
ventures............................................ (5,219)
Capital expenditures................................. (13,869) (22,028)
Proceeds from sale of fixed assets................... 1,045 148
-------- --------
Net cash used in investing activities................... (21,716) (30,481)
-------- --------
Cash flows from financing activities:
Payments on equity participation loans/exercise
of stock options.................................. 607 729
Net receipts/payments under notes payable to
banks............................................. 2,373 10,616
Borrowings on long term debt......................... 1,996 2,316
Payments on long term debt........................... (4,443) (1,688)
Proceeds from bank debt.............................. 14,500 22,977
-------- --------
Net cash provided by financing activities............... 15,033 34,950
-------- --------
Effect of exchange rate changes on cash and cash
equivalents.......................................... (311) 562
-------- --------
Net increase (decrease) in cash and cash equivalents....
2,799 (5,978)
Cash and cash equivalents at beginning of period........ 21,578 34,444
-------- --------
Cash and cash equivalents at end of period.............. $ 24,377 $ 28,466
======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
5
<PAGE>
SOLA INTERNATIONAL INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying consolidated condensed financial statements of the Company
have been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. Certain prior year items have been reclassified to
conform with the current year's presentation. These reclassifications had no
impact on total assets or net income. The consolidated condensed balance sheet
as of March 31, 1999 was derived from audited financial statements. The
accompanying consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year ended
March 31, 1999.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the statement of
financial position and measurement of those instruments at fair value.
Subsequently, the FASB issued SFAS No. 137, which defers the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company is in
the process of determining the impact that adoption and implementation will have
on its consolidated financial statements.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period. The results of operations for the nine months ended December 31, 1999
are not necessarily indicative of the results to be expected for the full year.
2. Inventories
December 31, 1999 March 31, 1999
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 18,970 $ 15,714
Work In Progress 7,451 6,551
Finished Goods 122,587 102,862
Molds 46,783 43,628
-------- --------
$195,791 $168,755
======== ========
Molds comprise mainly finished goods for use by manufacturing affiliates in
the manufacture of spectacle lenses.
3. Contingencies
The Company is subject to environmental laws and regulations concerning
emissions to the air, discharges to surface and subsurface waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials.
The Company is currently participating in a remediation program of one of
its manufacturing facilities under the Comprehensive Environmental Response,
Compensation and Liability Act and the Superfund Amendments and Reauthorization
Act of 1986. Since March 1997 the Company has curtailed clean-up activities, and
continues to monitor contamination levels. During the quarter ended December 31,
1997 a report on contamination levels, and the impact of
6
<PAGE>
curtailed activities, was submitted to the EPA, which indicates no significant
impact on the site from the curtailed activities, and the EPA has consented to
continued curtailment of activities. The Company expects continued reduction of
clean-up activities due to relatively low levels of contamination existing at
the site. Reserves for these clean-up and monitoring activities are considered
to be adequate by the Company and are immaterial to the Company's financial
position.
Under the terms of the sale agreement with Pilkington plc ("Pilkington"),
for the purchase of the Sola business in December 1993 ("Acquisition"),
Pilkington has indemnified the Company with regard to expenditures subsequent to
the Acquisition for certain environmental matters relating to circumstances
existing at the time of the Acquisition. Under the terms of the indemnification,
the Company is responsible for the first $1 million spent on such environmental
matters, Pilkington and the Company share equally the cost of any further
expenditures between $1 million and $5 million, and Pilkington retains full
liability for any expenditures in excess of $5 million.
In the ordinary course of business, various legal actions and claims
pending have been filed against the Company. While it is reasonably possible
that such contingencies may result in a cost greater than that provided for in
the financial statements, it is the opinion of management that the ultimate
liability, if any, with respect to these matters, will not materially affect the
consolidated operations, cash flows or financial position of the Company.
4. Comprehensive Income
<TABLE>
The components of comprehensive income/(loss), net of related tax, are as
follows (in thousands):
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 2,675 $5,176 $15,834 $25,276
Foreign currency translation adjustments (3,531) 1,078 1,080 (2,772)
-------- ------ ------- -------
Comprehensive income/(loss) $ (856) $6,254 $16,914 $22,504
======== ====== ======= =======
</TABLE>
5. Earnings Per Share
<TABLE>
The following table sets forth the computation of basic and diluted
earnings per share for the three and nine months ended December 31, 1999 and
1998 (in thousands except per share data):
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
------------ ------------ ------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income.......................................... $ 2,675 $ 5,176 $15,834 $25,276
Denominator:
Denominator for basic earnings per share -
Weighted average common shares
outstanding...................................... 24,875 24,792 24,871 24,770
Effect of dilutive securities:
Employee stock options............................ 200 407 242 760
------- ------- ------- -------
Denominator for diluted earnings per share -
Weighted average common shares and
dilutive securities outstanding.................. 25,075 25,199 25,113 25,530
Basic earnings per share............................... $ 0.11 $ 0.21 $ 0.64 $ 1.02
Diluted earnings per share............................. $ 0.11 $ 0.21 $ 0.63 $ 0.99
</TABLE>
7
<PAGE>
6. Special Charges
The special charges during the nine months ended December 31, 1999 comprise
costs associated with the consolidation of the Sola and American Optical
manufacturing facilities in Mexico, which was started in the fourth quarter of
fiscal 1999 ($2.6 million) and work force reductions in North America, Europe
and Rest of World ($0.9 million). In addition, special charges for the nine
months ended December 31,1999 include a charge of $0.2 million resulting from
currency fluctuations in the Brazilian Real against the US dollar. During the
three months ended December 31, 1999 the Brazilian Real appreciated against the
US dollar, resulting in a gain to special charges of $0.7 million, which offset
in part the erosion of $0.9 million charge in the prior quarter.
The special charges for the three and nine months ended December 31, 1998
of $1.6 million are the result of employee termination costs incurred in the
United States, primarily in Petaluma, California and Miami, Florida.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's consolidated
condensed financial statements and notes thereto included elsewhere herein.
In January 2000 the Company announced that it would be accelerating plans
to move certain production to lower cost sites, and that it was critically
evaluating operating expenses and manufacturing overhead expenditure levels. The
Company has not finalised these initiatives, however, it anticipates that once
finalised the plans could result in a special charge for reorganisation and
redundancy costs, the majority of which are expected to be recognized in the
fourth fiscal quarter of fiscal 2000. The Company also announced that it
believed earnings per share, before tax effected special charges, for fiscal
2000 will be between $0.85 and $0.95.
Results of Operations
Three months ended December 31, 1999 compared to three months ended December 31,
1998
Net Sales
Net sales totaled $127.2 million in the three months ended December 31,
1999, reflecting an increase of 0.7% from net sales of $126.3 million for the
same period in the prior year. Using constant exchange rates, the percentage
increase was 3.8%. Growth in Europe and Rest of World sales was offset in part
by a decrease in North America's sales. Progressive lens net sales for the three
months ended December 31, 1999 increased 7.9% from the same period in the prior
year, led by the Company's new progressive lens designs, AO Compact, Percepta
and Visuality. Higher priced products accounted for approximately 68% of net
lens sales in the three months ended December 31, 1999 compared to approximately
66% for the three months ended December 31, 1998. Net sales increases by region,
were as follows: Europe 5.1%, Rest of World 8.8%, and a decrease in North
America of 5.6%. Using constant exchange rates the regional increases were as
follows: Europe 15.9%, Rest of World 6.1% and a decrease in North America of
5.6%.
Gross Profit and Gross Margin
Gross profit totaled $55.3 million for the three months ended December 31,
1999, a decrease of 3.5% from gross profit of $57.3 million for the same period
in the prior year. Gross profit as a percentage of net sales ("gross margin")
decreased to 43.4% for the three months ended December 31,1999 from 45.3% for
the same period ended December 31, 1998. Both period's margin performances are
lower than traditional levels due to product mix changes and price erosion in
certain markets, and to lower production levels.
Operating Expenses
Operating expenses in the three months ended December 31, 1999 totaled
$46.5 million, an increase of 0.6% over operating expenses of $46.2 million for
the same period in the prior year. Included in operating expenses for the three
months ended December 31, 1999 and 1998 is $0.7 million, income, and $1.6
million, expense, respectively, representing special charges. If these charges
were excluded from both periods, operating expenses would have been $47.1
million for the three months ended December 31, 1999 an increase of 5.6% over
operating expenses of $44.6 million, for the same period in the prior year.
Operating expenses, excluding the special charges, for the three months ended
December 31, 1999 and 1998 as a percentage of net sales were 37.1% and 35.3%,
respectively. Research and development expenses for the three months ended
December 31, 1999 amounted to $4.9 million, compared to $4.6 million for the
9
<PAGE>
three months ended December 31, 1998, which represent 3.8% and 3.7% of net
sales, respectively. Selling and marketing expenses for the three months ended
December 31, 1999 increased $1.7 million to $25.8 million, compared to $24.1
million for the three months ended December 31, 1998 which represent 20.2% and
19.0%, of net sales, respectively. General and administrative expenses were
$16.5 million, or 13.0% of net sales, for the three months ended December 31,
1999, compared to $15.9 million, or 12.6% of net sales for the three months
ended December 31, 1998.
Operating expenses for the three months ended December 31, 1999 included a
gain of $0.7 million of special charges relating to appreciation of the
Brazilian Real against the US dollar. The special charges for the three months
ended December 31, 1998 of $1.6 million are the result of employee termination
costs incurred in the United States, primarily in Petaluma, California and
Miami, Florida.
Operating Income
Operating income, for the three months ended December 31, 1999 totaled $8.8
million, a decrease of $2.3 million from the operating income for the three
months ended December 31, 1998 of $11.1 million. If the special charges of $0.7
million, income, and $1.6 million, expense, are excluded from operating income
for the three months ended December 31, 1999 and 1998, respectively, operating
income would have been $8.1 million, a decrease of 35.8% over $12.6 million in
the same period in the prior year.
Net Interest Expense
Net interest expense totaled $5.0 million for the three months ended
December 31, 1999, an increase of $0.4 million. The increase in interest expense
is due primarily to increased borrowing rates.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate represents an
effective tax rate projected for the full fiscal 2000 year of 32%. For the three
months ended December 31, 1998 the Company recorded an effective income tax rate
of 23%, and for the full fiscal 1999 year the Company reported an effective tax
rate of 41.6%. The primary cause of the fiscal 1999 effective income tax rate of
41.6% was the Company booking a valuation allowance, and therefore no income tax
benefit, against the loss related to the Company's inability to collect the
accounts receivable from the original sale of the Brazilian frame and equipment
business, which the Company re-assumed in April 1999. If the special charges
reported in fiscal 1999 are excluded from income before provision for income
taxes, and the tax benefit associated with the special charges are excluded from
the provision for income taxes, the resulting effective combined state, federal
and foreign tax rate for fiscal 1999 would have been 32% or the same as the
projected rate for the full fiscal 2000 year. The Company has deferred tax
assets on its balance sheet as of December 31, 1999 amounting to approximately
$23.3 million. The ultimate utilization of these deferred tax assets is
dependent on the Company's ability to generate taxable income in the future.
Nine months ended December 31, 1999 compared to nine months ended December 31,
1998
Net Sales
Net sales totaled $401.9 million in the nine months ended December 31,
1999, reflecting an increase of 3.4% from net sales of $388.5 million for the
same period in the prior year. Using constant exchange rates, the percentage
increase was 4.9%. All three operating regions contributed to the increase in
net sales, due primarily to strong progressive lens sales. Growth in Rest of
World sales reflects a modest market recovery in Asia and a reasonably strong
market in
10
<PAGE>
South America despite the economic impact from the Brazilian Real devaluation in
January 1999. Progressive lens net sales for the nine months ended December 31,
1999 increased 14.1% from the same period in the prior year, led by the
Company's new progressive lens designs, AO Compact, Percepta and Visuality.
Higher priced products accounted for approximately 69% of net lens sales in the
nine months ended December 31, 1999 compared to approximately 67% for the nine
months ended December 31, 1998. Net sales increases by region, were as follows:
North America 2.2%, Europe 2.8% and Rest of World 7.9%. Using constant exchange
rates the regional increases were as follows: North America 2.2%, Europe 8.8%
and Rest of World 4.5%.
Gross Profit and Gross Margin
Gross profit totaled $178.2 million for the nine months ended December 31,
1999, a slight increase of $0.8 million from gross profit of $177.4 million for
the same period in the prior year. Gross profit as a percentage of net sales
("gross margin") decreased to 44.3% for the nine months ended December 31, 1999
from 45.7% for the nine months ended December 31, 1998. The margin decrease was
principally due to product mix changes and price erosion in certain markets, and
due to underabsorption of overhead due to a slowdown of production levels,
primarily in the first and third quarters of fiscal 2000.
Operating Expenses
Operating expenses in the nine months ended December 31, 1999 totaled
$141.8 million, an increase of $13.6 million, compared to operating expenses of
$128.2 million for the same period in the prior year. Included in operating
expenses for the nine months ended December 31, 1999 and 1998, is $3.7 million
and $1.6 million, respectively, representing special charges. If these charges
were excluded from operating expenses, operating expenses would have been $138.1
million, an increase of $11.4 million compared to $126.7 million for the same
period in the prior year. Operating expenses, excluding the special charges, for
the nine months ended December 31, 1999 and 1998 as a percentage of net sales
were 34.4% and 32.6%, respectively. Research and development expenses for the
nine months ended December 31, 1999 totaled $15.2 million, compared to $14.0
million for the nine months ended December 31, 1998, which represent 3.8% and
3.6% of net sales, respectively. Selling and marketing expenses for the nine
months ended December 31, 1999 increased $4.6 million to $76.8 million, compared
to $72.2 million for the nine months ended December 31, 1998 which represent
19.1% and 18.6%, of net sales, respectively. As a percentage of net sales,
general and administrative expenses increased to 11.5% for the nine months ended
December 31, 1999 compared to 10.4% for the nine months ended December 31, 1998.
The lower than historical general and administrative expenses in the nine months
ended December 31, 1998, primarily in the first three months of fiscal 1999,
reflected lower accruals for performance based bonuses and favorable changes in
estimates related to certain reserves and accruals.
Operating expenses for the nine months ended December 31, 1999 included
$3.7 million of special charges. The charges comprise costs associated with the
consolidation of the Sola and American Optical manufacturing facilities in
Mexico, which was started in the fourth quarter of fiscal 1999 ($2.6 million)
and work force reductions in North America, Europe and Rest of World ($0.9
million). In addition, special charges for the nine months ended December
31,1999 include a charge of $0.2 million resulting from currency fluctuations in
the Brazilian Real against the US dollar. During the three months ended December
31, 1999 the Brazilian Real appreciated against the US dollar, resulting in a
gain to special charges of $0.7 million, which offset in part the erosion of
$0.9 million charge in the prior quarter.
The special charges for the nine months ended December 31, 1998 of $1.6
million are the result of employee termination costs incurred in the United
States, primarily in Petaluma, California and Miami, Florida.
11
<PAGE>
Operating Income
Operating income for the nine months ended December 31, 1999 was $36.4
million, a decrease of $12.8 million, from the nine months ended December 31,
1998 operating income of $49.2 million. If the special charges of $3.7 million
and $1.6 million are excluded from operating income for the nine months ended
December 31, 1999 and December 31, 1998, respectively, operating income would
have been $40.1 million, a decrease of $10.7 million over $50.8 million in the
same period in the prior year.
Net Interest Expense
Net interest expense totaled $13.9 million for the nine months ended
December 31, 1999 compared to $12.9 million for the nine months ended December
31, 1998, an increase of $1.0 million. The increase in interest expense is due
primarily to increased borrowing rates.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended
December 31, 1999 amounted to $9.8 million, an increase of $20.8 million over
the funds used in operating activities of $11.0 million for the nine months
ended December 31, 1998. The most significant causes of the improvement are an
increase in accounts payable and accrued liabilities for the nine months ended
December 31, 1999, compared to a reduction in accounts payable and accrued
liabilities in the nine months ended December 31, 1998. These improvements in
operating cash flow are offset in part by the reduction in net income.
During the nine months ended December 31, 1999, using a three month net
sales annualized convention, inventories as a percentage of annualized net sales
were 38.5% compared to 39.0% for the nine months ended December 31, 1998. Lower
than anticipated net sales, primarily during the third fiscal quarter,
contributed to the growth of inventories as a percentage of net sales, compared
to the same ratio for the second fiscal quarter of 2000 (33% as of September 30,
1999). The Company has announced that it will be accelerating plans to move
certain production to lower costs sites. Together with these plans the Company
will be critically evaluating production in an attempt to reduce inventory
levels. Accounts receivable as a percentage of annualized net sales for the nine
months ended December 31, 1999 was 24.2% compared to 24.0% for the same period a
year ago.
Cash flows from investing activities in the nine months ended December 31,
1999 amounted to an outflow of $21.7 million, reflecting capital expenditures of
$13.9 million, investment in a joint venture in India and other trade
investments of $5.2 million, and acquisition of a wholesale laboratory in
Portugal in December 1999 of $3.7 million, offset by proceeds from the sale of
fixed assets of $1.0 million. Cash flows from investing activities in the nine
months ended December 31, 1998 were an outflow of $30.5 million of which $22.0
million represented capital expenditures, and $8.6 million represented
investment in acquisitions. The $8.6 million spent on acquisitions represents
the acquisition of the assets of an anti-reflection coating laboratory in
Oregon, USA, acquired by the Company in June 1998. Management anticipates
capital expenditures of approximately $25 million to $30 million annually over
the next several years, of which approximately $5 million to $10 million
annually is viewed as discretionary.
Net cash provided by financing activities in the nine months ended December
31, 1999 amounted to $15.0 million. The most significant source was the increase
in bank borrowings and long term debt used to fund investment activities in
excess of funds derived from operations. Net cash provided by financing
activities in the nine months ended December 31, 1998 amounted to $35.0 million.
The most significant source was the increase in bank borrowings and borrowings
of long term debt to fund the growth in working capital and the lab acquisition.
In addition to the Company's borrowings under its multicurrency Bank Credit
Agreement ($117.5 million borrowed as of December 31, 1999 under a $300 million
facility) and the Company's outstanding 6 7/8% Senior Notes, its foreign
subsidiaries maintain local credit
12
<PAGE>
facilities to provide credit for overdraft, working capital and some fixed asset
investment purposes. As of December 31, 1999 the total borrowing capacity
available to the Company's foreign subsidiaries under such local facilities was
approximately $46.4 million, of which $19.2 million had been utilized.
The Company continues to have significant liquidity requirements. In
addition to working capital needs and capital expenditures, the Company has
substantial cash requirements for debt service. The Company expects that its
multicurrency credit facility and other overseas credit facilities, together
with cash on hand and internally generated funds, if available as anticipated,
will provide sufficient capital resources to finance the Company's operations,
fund anticipated capital expenditures, and meet interest requirements on its
debt, including its Senior Notes, for the foreseeable future. As the Company's
debt matures, the Company may need to refinance such debt. There can be no
assurance that such debt can be refinanced on terms acceptable to the Company.
The Company has not experienced, nor does it anticipate experiencing, any
material adverse effects of the change over to the year 2000.
Currency Exchange Rates
As a result of the Company's worldwide operations, currency exchange rate
fluctuations tend to affect the Company's results of operations and financial
position. The two principal effects of currency exchange rates on the Company's
results of operations and financial position are (i) translation adjustments for
subsidiaries where the local currency is the functional currency and (ii)
translation adjustments for subsidiaries in hyper-inflationary countries.
Translation adjustments for functional local currencies have been made to
shareholders' equity. For the nine months ended December 31, 1999 and 1998 such
translation adjustments were approximately $1.1 million and $(2.8) million,
respectively.
For translation adjustments of the Company's subsidiaries operating in
hyper-inflationary countries, until recently primarily Brazil, the functional
currency is determined to be the U.S. dollar, and therefore all translation
adjustments are reflected in the Company's Statements of Operations. During
January 1999 the Brazilian Real devalued significantly against the U.S. dollar.
Between March 31, 1999 and June 30, 1999 the Real has stabilized in the 1.65 to
1.85 range against the US dollar. During the three months ended September 30,
1999, the Real deteriorated against the US dollar by approximately 8%, however,
during the three months ended December 31, 1999 the Brazilian Real strengthened
against the US dollar by approximately 7%. In hyper-inflationary environments,
the Company generally protects margins by methods which include increasing
prices monthly at a rate appropriate to cover anticipated inflation, compounding
interest charges on sales invoices daily and holding cash balances in U.S.
dollar denominated accounts where possible.
Because a majority of the Company's debt is U.S. dollar denominated, the
Company may hedge against certain currency fluctuations by entering into
currency swaps (however certain currencies, such as the Brazilian Real, cannot
be hedged economically), although no such swaps had been entered into as of
December 31, 1999. As of December 31, 1999 certain of the Company's foreign
subsidiaries had entered into forward contracts for intercompany purchase
commitments in amounts other than their home currency. The carrying amount of
the forward contracts approximates fair value, which has been estimated based on
current exchange rates.
Seasonality
The Company's business is somewhat seasonal, with third fiscal quarter
results generally weaker than the other three quarters as a result of lower
sales during the holiday season, and fourth fiscal quarter results generally the
strongest.
13
<PAGE>
Inflation
Inflation continues to affect the cost of the goods and services used by
the Company. The competitive environment in many markets limits the Company's
ability to recover higher costs through increased selling prices, and the
Company is subject to price erosion in many of its standard product lines. The
Company seeks to mitigate the adverse effects of inflation through cost
containment and productivity and manufacturing process improvements. For a
description of the effects of inflation on the Company's reported revenues and
profits and the measures taken by the Company in response to inflationary
conditions, see--"Currency Exchange Rates" above.
European Union Conversion to the "Euro"
The Company has instituted a "Euro" conversion team and begun preliminary
preparation for the conversion by eleven member states of the European Union to
a common currency, the "Euro". Conversion to the Euro by these member states of
the union will take place on a "no compulsion, no prohibition" basis between
January 1, 1999 and January 1, 2002. By January 1, 2002 all companies operating
in the eleven member states will be required to be fully operational using the
new currency. The Sola conversion team has primarily addressed the accounting
and information systems changes that are necessary to facilitate trading in the
Euro, the possible market place implications of a common currency and the
currency exchange rate risks, with the initial emphasis placed on the system
modifications. The Company has not completed the evaluation of the possible
effect of the changes to the Euro on intercompany foreign currency loans, or the
impact if any, on the market place implications of a common currency.
Preliminary assessments indicate that the financial impact of conversion to a
Euro based currency will not be material to the Company's consolidated financial
position, results of operations or cash flows.
Information Relating to Forward-Looking Statements
This quarterly report includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, including
statements regarding among other items, (i) the impact of inflation, (ii) future
income tax rates and capital expenditures, (iii) future special charges, and
(iv) the costs and other consequences related to the Year 2000 and conversion to
the Euro. These forward-looking statements reflect the Company's current views
with respect to future events and financial performance. The words "believe",
"expect", "anticipate" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Actual results could differ materially from the forward-looking statements as a
result of "Factors Affecting Future Operating Results" included in Exhibit 99.1
of the Company's Form 10-K for the fiscal year ended March 31, 1999, and the
factors described in "Business-Environmental Matters", also included in the
Company's Form 10-K for the fiscal year ended March 31, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Company's assessment of its
sensitivity to market risk since its presentation set forth in item 7A,
"Quantitative Disclosures About Market Risk", in its Annual Report on Form 10-K
for the fiscal year ended March 31, 1999.
14
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description Page Number
-------------- ----------- -----------
27 Financial Data Schedule 19
(b) Reports on Form 8-K
Not applicable
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sola International Inc.
(Registrant)
Dated: February 1, 2000 By: /s/ Steven M. Neil
-------------------- -----------------------
Steven M. Neil
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer
16
<PAGE>
Exhibit Index
Exhibit No. Description Page
----------- ----------- ----
27 Financial Data Schedule 19
17
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